Is it Time to Raise the Rent?
By Kerry Curry, Contributing Writer
For the real estate investor, deciding whether to raise the rent can be a difficult decision. It’s important to go about the process of raising the rent with the proper care and consideration to ensure the best outcome.
Studying your local market is an important first step. You’ll want to compare your rental rate with others in the same neighborhood. Take into consideration the number of bedrooms and bathrooms, the condition of your property and if there are nearby amenities such as parks and schools. Consider price adjustments for differences among the properties being compared.
Consider the financial ramifications
If it’s determined your property can support a rent increase, consider its potential effect on your tenants. If you raise the rent and your tenant says they’ll need to move, you’ll have to decide if it’s worth it.
Upon move-out, you’ll have to clean the property and you may need to make repairs and upgrades. You could miss out on rent while you seek another tenant, and you may incur real estate brokerage fees. In other words, a rent increase could cost you money.
On the other hand, if you’ve gone years without a rate increase and your property is priced significantly below market value, raising the rent may be worth the risk even if it means losing a long-time reliable tenant.
If you determine market conditions warrant the increase, then it’s important to go about it the right way.
Check local regulations
First, check for state and local landlord/tenant regulations.
“Everyone should check their local laws and ordinances,” says Karen Hart, a partner at Dallas-based law firm Bell Nunnally, who also invests in residential real estate. Some cities such as New York City, for example, have rent-controlled residential properties while states such as Texas have few statutes that a real estate investor will need to review before raising the rent.
Investors who are involved in federal, state or city funded low-income housing rental properties should be sure to check all applicable regulations related to that subset of rental property, she said.
Review the lease
“The main thing you need to look at is the lease and what it says about the term and what it says about renewal,” Hart said. “Make sure you read through your lease so that you can plan and you know your rights and you know your tenant’s rights,” she said.
Be considerate toward your tenants
If you want the tenant to stay at the higher rental rate, you’ll probably want to begin talking with your tenant about your plans approximately 90 days before lease expiration, Hart suggests.
Notice of a rent increase is unpleasant no matter how you couch it. If the increase is small, you may hear nothing from your tenants. But if the rent increase is significant, be prepared for tenants to want to negotiate the amount or to give notice of move-out. As a landlord, you’ll have to decide whether you are willing to negotiate or stand firm on the amount of the increase.
If the tenant doesn’t renew, you’ll want to use the 90-day window before lease expiration to get the property listed with the goal of reducing the vacancy period after your current tenant moves out.
If the tenant renews, make sure to get the new rate in writing via a lease addendum or a new lease agreement, Hart said.
Provide incentives to stay
If the rent increase is significant, consider property improvements to encourage your tenants to remain, suggests Kevin Perk, a real estate investor and co-founder of Kevron Properties in Memphis in a recent Bigger Pockets post.
You could offer to repaint, add ceiling fans or provide another upgrade to make the tenants feel like they are getting something in return for the increased rent, he suggests.
Raising the rent isn’t a simple decision. Consider all the implications. Then, if the time is right, follow all applicable regulations and by all means be considerate of your current tenants, doing what you can to encourage them to stay.
“The big thing is to make sure you are communicating with your tenant,” Hart said. “Give them enough time so that they can plan and you can plan.”
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